The Economic Implications of BREXIT

24/06/2016 - 12.21

BREXIT – Economic and Political Implications

The vote to leave the EU has major implications economically and politically. Economically, the £ had fallen by over 10% against the US$ and over 7% against the € before 9am. The FTSE100 had fallen by more than 500 points shortly after the markets opened.

This market instability is the result of the uncertainty caused by the BREXIT result and was widely predicted by economists and REMAIN advocates. The economic impact is likely to be significant. Whilst a falling sterling makes exports cheaper, it makes imported goods more expensive and could create inflationary pressures in the UK economy.

Given the downward pressure on sterling it might lead to a rise in interest rates, but given the likelihood of worsening economic growth further austerity measures are likely to offset the monetary requirements for higher interest rates. Indeed, interest rates could be cut to 0% in the near future, but this is not a signal of a strong economy.

Uncertainty about the future may see business investment levels fall in the near future with knock-on effects in terms of rising unemployment. It also makes it extremely unlikely that the government will meet its targets in lowering the budget deficit. Further, the falling values of shares will lower the value of pension funds with significant effects on future pension levels. Fundamentally, the economic situation is more uncertain than it was yesterday.

Will the break-up of the UK be a probable outcome?

Politically, the result is likely to lead to renewed calls for a new referendum on Scottish independence, with the break-up of the UK a probable outcome. The position in Ireland is potentially explosive and how the border situation is dealt with could put the peace agreement at significant risk. With the Prime Minister announcing his attention to resign we can expect many months and even years of considerable uncertainty.

A general election is possible within the next 12 months with a background of much uncertainty.